California’s refusal to settle a staggering $20 billion federal loan from the COVID-19 era is hitting businesses where it hurts—right in the payroll taxes.
According to the New York Post, while most states cleared their pandemic-related unemployment debts using federal stimulus funds, California stands alone, prioritizing pet projects over fiscal responsibility, leaving employers to foot the bill through escalating taxes.
Let’s rewind to the pandemic’s peak in 2020, when a historic surge in unemployment claims forced the state to shell out $24 billion in benefits—more than double the high seen during the Great Recession.
Entering the crisis with just $3 billion in its unemployment insurance trust fund, as reported by the Legislative Analyst’s Office in December 2024, California was woefully unprepared for the deluge of claims.
Historically, since the 1980s, the state has struggled to generate enough revenue to cover unemployment benefits during economic downturns, a systemic flaw that’s now biting hard.
To bridge the gap, California borrowed $20 billion from the federal government, a loan that remains unpaid, while other states used stimulus cash to wipe their slates clean.
Instead of tackling this debt head-on, California diverted federal relief to infrastructure and homelessness initiatives, leaving the $20 billion principal—plus $20.6 billion as of mid-2025—hanging over everyone’s head.
Now, employers face an extra $42 per employee in payroll taxes next year, with increases expected annually until the debt is cleared, a slow bleed that’s drawing ire from business advocates.
“This is called the greatest hidden tax,” Rob Lapsley, president of the California Businesses Roundtable, told KCRA’s California Politics 360, and he’s not wrong—businesses are being squeezed to clean up the state’s mess.
While Governor Gavin Newsom allocated $750 million in the 2024 fiscal budget to chip away at the loan, that funding was ultimately slashed, leaving businesses to wonder if Sacramento even cares.
In July 2025, the California Department of Finance approved $642.8 million for interest payments, but the principal looms large, a Band-Aid on a gaping wound. Business groups pleaded for tax rebates in 2025 to ease the burden, but their calls fell on deaf ears in the state capitol, where other priorities seem to trump fiscal accountability.
Adding fuel to the fire, the state’s Employment Development Department, tasked with managing unemployment claims, admitted to paying out up to $31 billion in fraudulent claims during the pandemic—a taxpayer scam of historic proportions, according to prosecutors.
By June 2022, only $1 billion of those fraudulent funds had been recovered, per a press release from Newsom’s office, leaving a bitter taste for those footing the legitimate bill.
“Functionally, this means California employers are facing a decade or more of tax increases,” warned a coalition of business groups in a February 2025 statement, and with Sacramento’s track record, that prediction feels less like a warning and more like a guarantee.